Compliance News

Issue 7 – April 2014

Welcome to the seventh edition of Compliance News. It contains an assortment of material that should interest you. Please forward it to your colleagues as appropriate. We provide updates on a number of activities—including the publication of the latest version of our Handbook which includes important consumer credit changes; the work we are doing to support firms affected by the criminal legal aid changes; changes in legislation affecting salaried partners and partnerships with mixed memberships; the publication of the Independent Comparative Case Review; news of our proposal to give lifetime licences to sole practitioners and a policy statement on multi-disciplinary partnerships (MDPs).

You will see a common theme emerging—that of reducing bureaucracy and burdensome regulations wherever it is appropriate to do so.

Our Question of Ethics provides clarification on what happens if a sole practitioner becomes bankrupt. We also provide some helpful examples of what constitute material breaches.

We have three consultations open at the moment. The first sets out the new approach that we propose to take to the authorisation of law firms from European Establishment Directive States; the second to residual client balances, and the third to keeping of the roll. You can find links to each of these consultations at the end of this newsletter.

These are just some of the highlights of this edition.

Consumer credit changes in new Handbook version

Version 9 of the SRA Handbook which came into effect on 1 April 2014 is available on the SRA website. One of the key amendments is the change to the SRA Financial Services (Scope) Rules as a result of the transfer of the regulation of consumer credit activities to the Financial Conduct Authority.

Plans to review our approach to MDPs

In his first keynote speech for the SRA since joining in January, Executive Director for Policy Crispin Passmore announced that we would be consulting in the summer around a change in licensing multi-disciplinary practices (MDPs) as alternative business structures.

Have you provided your workforce diversity data?

Our Supervision team is contacting all those firms who have so far failed to complete the Workforce Diversity data exercise. All authorised entities are covered by this exercise. Some firms have reported the diversity data for their main firm but have failed to report on a related entity, which registers on our system as non-compliant. You do not need to report the data separately for any related entities (for example corporate partners, trustee or nominee companies) but you will need to link that entity to the main firm. You can do this simply by using the "Organisation Selection" tab on the "Organisation Diversity Data" page on mySRA. If you have any problems with this please contact us at diversity@sra.org.uk. Non-compliance may lead to enforcement action. To avoid this, you should update mySRA with your diversity data immediately.

Support for firms impacted by legal aid cuts

We are in close liaison with both the Ministry of Justice and the Legal Aid Agency to ensure that we offer relevant support to those firms considering the impacts of the criminal legal aid cuts and possible options relating to their firm structures. In addition to providing updated information on our website in the near future, complementing that published by the Ministry of Justice, we are also planning some direct engagement with those firms most heavily impacted by the cuts, to assess what plans they have in place to mitigate the risks and issues they might be facing.

Reminder about complaints procedures

We have worked with the Bar Standards Board (BSB) to draw up guidance reminding solicitors of their obligations to inform clients of complaints procedures. While solicitors are making complaints information available to clients directly, when they instruct barristers, not all are passing on this secondary package of information. Barristers also have an obligation to make complaints information available, but if solicitors do not forward on the details or give barristers contact information for the client, then they are unable to fulfil this requirement. These requirements were introduced by the Legal Services Board in May 2010, and are reflected in the SRA's Code of Conduct 2011 and the BSB's Handbook.

Recording and reporting breaches: Helpful examples

You need to have a system in place to record any failures in compliance so that you can monitor overall compliance with the firm's obligations and assess the effectiveness of its arrangements and systems. The record of breaches also allows you, in your compliance officer role, to decide whether you need to report breaches as material, because they form a pattern of non-compliance. Breaches which are material—either in themselves or because of a pattern—must be reported to the SRA as soon as reasonably practical. In most cases, that should mean immediately.

A common question from compliance officers is what constitutes a material breach. In considering whether a failure or breach is material, you will need to take account of various factors such as:

the detriment, or risk of detriment, to clients;

the risk of loss of confidence in the firm or in the provision of legal services;

the scale of the issue; and

the overall impact on the practice, clients and third parties.

Follow the link below for examples of recent reports the SRA has received from compliance officers.

Question of ethics

In the February 2014 print edition of the Compliance News Round-up, the first case study dealt with the bankruptcy of a sole practitioner. It referred to the fact that the solicitor's practising certificate would be automatically suspended and the solicitor would therefore need to employ another solicitor to operate the client account. Is this correct?

For help determining whether an organisation requires authorisation, or which individuals require approval, contact our Professional Ethics helpline.

Training for Tomorrow to host Twitter Q&A session

Do you have questions about Training for Tomorrow? Are you interested in the new competence standard for solicitors, CPD, or the qualification process? On Thursday, 8 May, from 12.30pm to 1.30pm, the SRA's Education Team will be live on Twitter to answer your questions. Let us have your views, comments and queries, and we will respond live.

Proposal: Lifetime licences for sole practitioners

We have issued a policy statement that could result in sole practitioner firms being treated like all other practices—reducing the regulatory burden on them.

Solicitors who wish to operate as sole practitioners have to apply for their status to be recognised every year as part of the renewals process. Other firms only have to be authorised once—receiving "lifetime licences".

We are now working towards introducing a consistent approach and remove the need for sole practitioners to renew their status annually.

If the change goes ahead, sole practitioners would not need to have the "sole solicitor endorsement" condition added to their practising certificate. They would still need to apply for a PC, as all solicitors do, so removing the need to apply for the condition would not increase any risks.

The SRA will now await the results of an upcoming Legal Services Board's consultation on the same issue. Anyone with views on the policy statement can email policy@sra.org.uk.

Sole practitioner firms make up 28 per cent (2,967) of all solicitor practices (10,554) in England and Wales, according to latest figures.

Independent Comparative Case Study Review

In March we published the report of the Independent Comparative Case Review (ICCR), conducted by Professor Gus John.

The report presents the results of case reviews and of a statistical analysis of SRA data. The terms of reference of the review were: "to identify whether there is disparity in the way the SRA applies its policies and procedures in dealing with BME practitioners as compared to others with a view to identifying potential improvements to such practices, policies and procedures to maximise fairness and consistency." The 238-page report is the result of one of the most extensive pieces of independent research and analysis into regulatory outcomes for BME solicitors and builds on work that we previously commissioned from Sir Herman Ouseley (2008) and Pearn Kandola (2010).

The review comprised:

a statistical analysis of regulatory outcomes by ethnicity and gender

a comparative case file review

a review of a sample of closed cases where discrimination had been alleged and surveys, focus group sessions and follow-up interviews with a range of individuals, and

groups, including solicitors who had been subject to regulatory action and those who defend themselves in the Solicitors Disciplinary Tribunal (SDT)

It found that:

the data examined provided no evidence of the SRA applying its policies and procedures in a manner that amounts to discrimination against BME practitioners

the data did provide evidence of disproportionality at a number of stages in the regulatory process, including in the number of complaints brought against regulatory outcomes for BME practitioners, as well as in the sanctions that were imposed upon them both by the SRA and by the SDT

a number of factors rendered BME practitioners and small firms more vulnerable to cases being raised against them and to regulatory action than their white counterparts

the results of the review should not be interpreted as evidence of discrimination or racism, but that a number of complex socio-economic factors must be considered as part of a comprehensive discussion of proportionality

there was no evidence of discrimination in the cases reviewed where discrimination had been alleged

The report makes 50 recommendations for consideration by the SRA, SDT and Law Society.

Risk Index update

We have updated our Risk Index to provide an improved view of regulatory risks.

Risk-based regulation is a key part of our outcomes-focused regime, and firms too should have embedded sound risk management processes into their delivery of legal services. The Risk Index has been updated to reflect that some risks impact in different ways.

The Index was originally produced in December 2012 as part of our Regulatory Risk Framework. The Framework explains how we identify, assess, monitor and control risks to the delivery of the regulatory outcomes.

The third part of the jigsaw is the Risk Outlook, which outlines how the Authority views the key risks to its regulatory objectives. It was first published in July last year, but was updated in November and again last month.

Keeping of the roll

The dates for the keeping of the roll will be announced shortly, but the exercise is expected to run from early May to early July. We will be contacting all individuals involved. Please ensure that your contact details are kept up to date in mySRA.

Consultations

Registered European lawyer regime

This consultation sets out the new approach that we propose to take to the authorisation of law firms from European Establishment Directive States. This approach is designed to apply the SRA's entity-based regulatory regime to European law firms in a proportionate way, depending on their form of practice in England and Wales. The new approach is also intended to clarify to the users of registered European Lawyer (REL) firm services what protections and rights of redress exist. The consultation closes on 14 April.

Red Tape Initiative: Residual client balances

This consultation seeks views on proposals to amend the SRA Account Rules 2011 relating to how practitioners deal with client money they are unable to return to clients at the end of a matter (residual client balances), including the processes surrounding the withdrawal of such funds and the basis for distribution to charities. The consultation closes on 26 May.

Annual keeping of the roll exercise

We seek your views on removing the present, burdensome process which requires solicitors who do not hold practising certificates to complete a yearly online application and pay a fee if they wish their name to remain on the roll of solicitors. The consultation closes on 26 May.